Editor’s note: After a year-long hiatus,
Steven Pearlstein’s business and economics column resumes today. It
will appear every other week in Sunday Business. Pearlstein is also a
professor of public and international affairs at George Mason
University.

I made my first trip to a Red Lobster
last week — I had the Bar Harbor Lobster Bake — to better understand
the financial melodrama that is playing out on Wall Street and in the
company’s boardroom. It’s a case study of everything that’s wrong with
the current version of “shareholder capitalism.”

Steven Pearlstein is a Pulitzer Prize-winning business and
economics columnist at The Washington Post.

Red Lobster, along with Olive Garden, LongHorn Steakhouse and the
Capital Grille, is part of Darden Restaurants, the country’s leading
operator of casual-dining restaurants. Last spring, Barington Capital,
a small “activist” hedge fund, bought a 2 percent stake in Darden and,
as such funds always do, presented Darden management with a
restructuring plan designed to boost its stock price by 65 percent.
The plan called for breaking Darden into three more-focused and
efficient public companies — one with its mature, slow-growing brands,
such as Red Lobster and Olive Garden, another with its younger,
faster-growing brands, and a real estate investment trust to own and
manage Darden’s extensive portfolio.

Darden’s management hired Goldman Sachs
to help it consider how to deal with the challenge and finally
announced the week before Christmas that it would spin off Red Lobster
as a separate company, load it up with debt, slow expansion of its
other brands and use the extra cash to buy back shares — all of it in
the cause of delivering “enhanced shareholder value,” the polite
euphemism for goosing up the stock price.

That restructuring plan failed to
satisfy Barington, or any of the other activist hedge funds, which
tend to prey on the same quarry. A second, Starboard Value, which now
has 5 percent of Darden’s shares, put forward an even more aggressive
plan that included “monetizing” existing restaurants by selling them
off to franchisees. Starboard made explicit a threat that Barington
had only implied: that if it doesn’t get its way, it will mount a
campaign to oust the company’s directors and management.

To savor the delicious irony of this
situation, a little Darden history is in order.

It begins in 1970 when General Mills,
maker of Cheerios, Pillsbury flour and Betty Crocker brownie mix,
decided that it could deliver more growth and greater stock price
stability to investors if it diversified into other industries that
had different cycles, cost pressures and risks. Over the next decade,
it bought toy companies (the makers of Play-Doh and Monopoly) and
clothing companies (Eddie Bauer and Talbot’s) with the idea that its
access to cheap capital and sophisticated management would allow it to
build them into big new divisions. William Darden’s small Red Lobster
chain was bought by General Mills in 1970, and Darden stayed on as a
top executive as the company expanded its restaurant division.

Wall Street loved such conglomerates —
until it came to realize that they had a knack for taking well-run
companies, expanding them too fast, hobbling them with too much
bureaucracy and running them into the ground. So by the mid-’80s, Wall
Street began demanding that companies focus on core products in which
they held dominant positions and sell off everything else. Many
divisions were sold at discounted prices to private-equity firms that
quickly turned them around and took them public again at hefty
profits. Others were spun off to shareholders as separate public
companies. Once again, the rationale was “enhancing shareholder
value.”

By the time what became Darden
Restaurants was spun off in 1995, it had successfully launched Olive
Garden, its family Italian restaurant, and was well on its way to
every major suburban shopping mall in America. Using well-tested
operational formulas, it provided good value to budget-conscious
suburbanites, relying on national television advertising and price
promotions to drive traffic. Wall Street loved the Darden growth story
— until it realized that Red Lobster and Olive Garden had pretty much
saturated the market.

Desperate to win the kind of stock price
valuations (and incentive compensation) that only growth companies
command, Darden embarked on a strategy of buying up smaller restaurant
chains with potential to be taken national. In 2007, it bought
LongHorn Steakhouse and Capital Grille for $1.4 billion. In 2011, it
was Eddie V’s, a higher-end fish restaurant, for $59 million. And in
2012, it was Yard House, an American pub-style chain, for
$585 million. In each case, Darden executives touted the acquisition
as a way to generate sales and earnings growth, diversify the
company’s customer base and leverage operational synergies, all of it
in the service of enhancing shareholder value.

Unfortunately for Darden, the synergies
and efficiencies never materialized (they rarely do), while growth
from the new brands was not enough to offset the decline in sales and
profitability of its much larger mature brands. So Darden found itself
in that Wall Street no-man’s land where it could not be neatly
categorized as either a pure growth company or a mature,
dividend-paying stock. It was only a matter of time before analysts
would downgrade the stock, activist hedge funds would pounce, and the
company would be forced into yet another bout of financial engineering
to “unlock” the unrecognized value of its assets and “enhance
shareholder value.”

The news release announcing Darden’s new
strategy, and the transcript of the management’s conference call with
Wall Street analysts, read like a parody of the financial mumbo-jumbo,
management buzzwords and PR spin that passes for corporate
communication these days.

During the conference call, executives
who were privately seething at what they view as the unfair public
criticism hurled at them by the activists hedge funds lined up to
declare how “thrilled” and “excited” they were about the new strategy
and structure. And while “value for shareholders” was mentioned in
virtually every paragraph, there was little or no mention of improving
the food or service for customers or sharing any of the benefits of
restructuring with front-line employees, 20 percent of whom earn the
legal minimum of $2.30 an hour before tips.

The first thing to understand about
these never-ending bouts of buying up and spinning off is that they
create little, if any, long-term economic value. If running
slow-growing Red Lobster is really so different from fast-growing
LongHorn Steakhouse, there is no reason Darden could not organize
itself in a way that lets every brand, or group of similar brands, be
managed independently, with centralized technology, purchasing,
marketing and real estate services made available to brand managers
who want to take advantage of any benefits or efficiencies they might
offer.

And while it is true that there are some
investors who want to buy growth stocks and others who like stocks
offering stability and dividends, there are also plenty of investors
who seek a combination of growth and income, and ought to be clever
enough to assign different valuations to different segments of the
company.

These endless restructurings are nothing
more than a con game concocted to generate short-term trading profits
and investment banking fees for the Wall Street wise guys and inflated
compensation for executives. It has little, if anything, to do with
providing good value to customers. It has nothing to do with providing
good jobs for workers. And, ironically, it doesn’t even generate a
better return to long-term shareholders. It is the last refuge of weak
and unimaginative corporate leaders who are unwilling to or can’t
succeed the old-fashioned way — by recruiting and motivating loyal
employees to provide great products and services at competitive
prices.

As for the lobster bake, it was a
generous portion, fresher tasting than I expected but a bit bland. The
freshly-baked cheese rolls were a big hit.

This Forum program is open, free of charge,
to anyone concerned with investor interests in the
development of marketplace standards for expanded access to
information for securities valuation and shareholder voting
decisions. As stated
in the posted
Conditions of Participation, the
Forum's purpose is to provide decision-makers with access to
information and a free exchange of views on the issues
presented in the program's Forum
Summary. Each
participant is expected to make independent use of
information obtained through the Forum, subject to the
privacy rights of other participants. It is a Forum
rule that participants will not be identified or quoted
without their explicit permission.

This Forum program was initiated to address
issues and objectives defined by participants in the 2010 "E-Meetings"
program relevant to broad public interests in marketplace
practices, rather than investor decisions relating to only a
single company. The Forum may therefore invite program
support of several companies that can provide both expertise
and examples of leadership relating to the issues being
addressed.

The information provided to
Forum participants is intended for their private reference,
and permission has not been granted for the republishing of
any copyrighted material. The material presented on this web
site is the responsibility of
Gary Lutin, as chairman of the Shareholder Forum.

Shareholder Forum™
is a trademark owned by The Shareholder Forum, Inc., for the
programs conducted since 1999 to support investor access to
decision-making information. It should be noted that we have
no responsibility for the services that Broadridge Financial
Solutions, Inc., introduced for review in the Forum's
2010 "E-Meetings" program and has since been offering
with the “Shareholder Forum” name, and we have asked
Broadridge to use a different name that does not suggest our
support or endorsement.